Hong Leong Bank’s FY17 normalized net profit of RM2.25bn was in-line with market and Affin’s estimates. HLB remains operationally robust - NIM rose by15bps yoy while asset quality remains sound (GIL ratio at 0.96%), despite a few isolated cases of impairments. We believe that HLB is poised for stronger years in FY18-20E as it takes advantage of its ample balance sheet liquidity (LCR 137%; LDR 80.6%) to fuel loan growth. Maintain BUY, PT revised up to RM17.00 (based on 1.38x CY18E P/BV) from RM15.68, as we raise our FY18-19 earnings forecasts by 3.6-5.3%. A 30 sen DPS was proposed (4Q16: 26 sen).

FY17 Normalized Net Profit of RM2.25bn; Headline at RM2.1bn

HLB reported a FY17 normalized net profit of RM2,247m (+10.5% yoy) on the back of: i) stronger fund-based income growth (+9.0% yoy), +15bps increase in NIM to 2.09%; ii) non-interest income growth (+8.6% yoy); and iii) higher associate’s profit contribution, with Bank of Chengdu’s (BOCD) making up 12.5% of PBT. This was partially offset by higher impaired loan allowances (+206% yoy as credit cost normalizes and due to impairments on some isolated cases). Meanwhile, headline net profit was RM2,145m (+12.7% yoy) and hit by a non-recurring taxation of RM102m, due to under-provision at a subsidiary. 4Q17 core net profit rose by 2.7% qoq as the operating income expansion was offset by higher allowances and overheads.

Key strengths – ample balance sheet liquidity and sound credit quality

In our view, HLB is poised for stronger growth in FY18-20E as it leverages on its ample balance sheet liquidity, implied by its 30 June 17 gross loan-to-deposit ratio (LDR) of 80.6%. In our current assumption, we have already factored-in an increase in the LDR to circa 82%. Sound credit management remains another key strength. We concur with management’s guidance of a gross impaired loan (GIL) ratio of < 1% in FY18E.

Maintain BUY; Price Target Revised to RM17.08 From RM15.68

We maintain our BUY rating on HLB and revise our Price Target from RM15.68

(1.29x CY18E P/BV) to RM17.00 (1.38x CY18E P/BV, based on CY18E ROE of 10.6%). We revised our FY18E/19E net profit by +5.3%/+3.6% as we factor in improved NIM by another +10bps to c.2.1% arising from higher loan yields (as the group steps up lending to the SME segment) and slightly lower funding cost (through higher CASA growth and repayment of a USD300m senior bond). Downside risks: i) NIM pressure; ii) asset-quality issues.

Source: Affin Hwang Research - 25 Aug 2017